Jo Cowling answers a reader’s query about how mortgages work in France…
Q. I am thinking about buying a property in France and would like to understand the difference between mortgages in France and the UK.(Keith Barnham, by email)
A. There are three major differences with mortgages in France compared to those in the UK: they are almost always based in euros; affordability is calculated in a different way and the products are slightly different from those available in the UK.
The vast majority of French banks only provide mortgages secured against French property in euros, which of course makes sense as the properties are always valued in this currency. Some offshore lenders and private banks will consider providing finance to clients in other currencies, generally when their income is in a different currency.
As the value of the loan is in euros, the interest rate you will pay on the mortgage will be based on a Euribor (European Inter Bank Offered Rate) interest rate, which is in turn linked to the European Central Bank base rate – which, at the time of writing, is 2 per cent. The interest rate you pay on your mortgage tracks one of the Euribor indices, such as the Euribor 3- month rate (currently 1.927 per cent) plus a margin of anywhere between 1 and 3 per cent depending on the product.
As a general rule, affordability in France is based on an individual’s debt-to-income ratio rather than on earnings multiples. The French lender will normally allow between 30 and 40 per cent of your gross income to be taken up repaying any existing mortgages you may have, other loan commitments and the new mortgage you are looking to take out on your French property.
It is this more conservative approach to assessing affordability that is one of the reasons why French banks now find themselves in a stronger position, as far as lending is concerned, than their UK counterparts.
Although the amount you can borrow varies slightly lender by lender, French banks also take a more cautious view regarding potential rental income that any property may generate. Generally, consistent proof will need to be provided that a property has been rented out over a number of years together with confirmation of the level of rental income that has been achieved. Even then only a percentage of this income will be considered when assessing affordability.
When deciding whether a French mortgage is right for your situation, you will need to be aware of the effects the different options will have and the foreign exchange implications. Changes in exchange rates will have a significant effect on the sterling cost of completing the purchase of your property in France, while using a French mortgage will mean that your monthly mortgage payments will be affected by the exchange rate you receive when transferring money.
The current volatility of the €/� exchange rate highlights the effects this can have. While seeing your monthly mortgage payment increase by 20 per cent is far from ideal, seeing the entire sterling cost of a French purchase rise by 20 per cent is going to have a far more significant and long-lasting effect on the health of your bank balance.
It is becoming more widely accepted that taking out a euro mortgage to fund at least a proportion of the value of the French property you are looking to buy provides you with a natural form of currency protection on the sterling cost of your new home. What is more, if you feel uncomfortable having a French mortgage in the longer term, you can opt for a flexible option with low or no redemption penalties that can be redeemed at a later date when the sterling/euro exchange rate improves in your favour.
When looking at the type of products available on the French mortgage market you may notice that long-term, fixed-rate mortgages are much more popular than in the UK. Mortgages in France consist of fixed-rate products for the term of the mortgage and socalled variable’ products that are fixed for an initial 3-month or 1-, 2-, 5-, 10- or 15-year period. After this initial fixed period the mortgage will track one of the Euribor indices plus the margin.
Remortgaging in France is a lot less common than in the UK, primarily due to the costs involved. When you purchase a property in France you will need to register the mortgage deed in addition to the deed of the sale. If you wish to change your mortgage in the future you will need to go back to the notaire to re-register the deed of the mortgage which obviously incurs additional costs.
It is therefore very important that you pick the right product to start with and this is where working with a good French mortgage broker who has access to the entire market can give you a significant advantage. In addition to having the language skills required to ensure the process proceeds as smoothly as possible, a broker will often have access to lower interest rates and arrangement fees than you may expect to obtain when approaching a lender directly.
Finally, when interest rates do change, many French lenders will keep your monthly repayments the same and either extend or reduce the term of your mortgage instead rather than change the monthly repayments. Many people prefer this approach as it provides the peace of mind of knowing that your monthly mortgage payments will remain the same, allowing you to budget during the entire term of your mortgage.